Outsourcing in the global economy

Globalisation of economies has triggered massive changes in the way trade and businesses are carried out in the new era supported by advanced technology and innovation in the field of information exchange. Business outfits are redefining their strategies to accommodate benefits of advanced technology in search of cost advantage and efficient management of work processes.

Outsourcing has been defined as “an arrangement whereby a third party provider assumes responsibility for performing information systems functions at a pre-determined price and according to pre-determined performance criteria” (Northfield, 1992).

The outsourcing trend has gained rapid momentum over the past few years. Organizations are rapidly adopting the concept of transferring work processes to external parties in pursuit of low cost of operations and efficient handling of resources. The essential advantage that this strategic concept provides is the opportunity to cut costs and boost productivity.

The primary benefit of outsourcing is realized in terms of reduced cost of operations owing to comparative lower wages, increased productivity, expertise in specified work process, and improved focus on business operations. Expanding business units and multinational companies have specialized work departments to handle each segment of work. These units ensure the flow of information establishing well-defined channels of workflow that focuses on increasing productivity and enhancing the work quality. The channelisation of work processes ensures better quality of work and helps in minimizing errors and risks. Moreover, the staffs get attuned to specific work processes that enable them to improvise and innovate on the existing work techniques.

Outsourcing IT operations to third party vendors has become a common strategy for most companies. This involves outsourcing of the company’s computer operations, network operations or any other IT function to an external service provider for a specified period of time. These external parties perform the same function that the IT department will perform in-house.

Increasing volumes of work and expanding client base is one of the primary reasons for outsourcing work processes in the IT sector. Multinational banks like HSBC, Citibank, American Express Bank and others outsource their process like credit card billing, collection, follow-ups and client build-up through various outsourcing agencies located in developing countries like India and China.

The outsourcing debate has been centred on the fact that employment opportunities are being shifted to emerging economies that provide low wages to similarly qualified people. There are pros and cons attached to this debate since it is a reality that globalisation has extended opportunities and focus to the developing and under-developed economies.

This has not only improved the lives of the people in these countries due to increased employment opportunities, better pay packages resulting in higher standards of living. But in reality the growing outsourcing industry has made it highly competitive and companies are offering attractive salaries to retain their workforce.

A high rate of attrition is a challenging issue with most companies who are forced to raise the salary levels as a result. Hence it turns out that it is no longer cheaper to outsource to some locations and outsourcers need to re-think their business strategies to maintain their profit margins.